The Bank of England (BoE) has raised UK interest rates to 5.25%, a level not seen in the last 15 years, marking the 14th consecutive increase. This decision takes the rate up from 5%, further pressuring borrowers and mortgage-holders.
This bold step shows the Bank’s commitment to combat inflation, which had dipped to 7.9% in June – a figure still four times greater than the targeted 2%. Although this rise will likely cause more discomfort to borrowers, it occurs at a time when there are indicators of a slowdown in the UK’s economic recovery.
BoE’s Governor Andrew Bailey predicts a decline in inflation to around 7%, followed by a more significant fall to 5% in October’s data. Should these forecasts prove accurate, Chancellor Rishi Sunak could achieve his aim of cutting inflation by half in November.
Richard Donnell, Executive Director of Research at Zoopla, provided some perspective, stating: “It’s not all doom and gloom for the housing market. There are signs that mortgage rates are peaking and 87% of mortgages are on fixed rates.” He added that the effect is not consistent across the UK, with higher mortgage rates having more substantial impact in higher-value markets in Southern England compared to the north of England and Scotland, where house prices continue to rise.
However, concerns were also voiced. Giles Mackay, founder of data science platform Outra and instant buying firm UPSTIX, warned about the sustainability of the country’s buy-to-let sector, particularly exposed to interest-only mortgages.
Jonathan Samuels, CEO of Octane Capital, argued that the BoE might have been too conservative. “It’s far better to have a short period of pain brought about by higher interest rates, rather than a sustained period of significant economic turmoil and uncertainty,” he remarked, suggesting that the U.S.’s aggressive rate-hiking strategy was a more successful approach.
In the housing market, some believe the continuous base rate hikes may hinder potential growth. Marc von Grundherr, Director of Benham and Reeves, described the situation as “yet another nail in the coffin for the nation’s borrowers” and expressed concerns over further stagnation of house prices.
James Forrester, Managing Director of Barrows and Forrester, compared the constant increases to a sort of “Bank of England Groundhog Day,” raising fears among the latest generation of buyers regarding the steep borrowing costs.
Despite these concerns, Chris Hodgkinson, Managing Director of House Buyer Bureau, observed that the property market remained resilient, and Bradley Post, CEO of RIFT Tax Refunds, criticized the BoE’s “aggressive” approach as ineffective in curbing inflation.
Others offered a more optimistic view, such as Paresh Raja, CEO of Market Financial Solutions, who noted that the smaller-than-expected increase might be a positive sign, and Jatin Ondhia, CEO of Shojin, who expressed hope that the rate hikes might be nearing an end.
The overall impact of this consistent rise in interest rates has varied opinions. Some fear it could lead to a more stagnant market and higher pressure on borrowers, while others see signs of stability and potential growth. What is certain is that the BoE’s aggressive stance on inflation will continue to shape the economic landscape in the coming months, affecting various sectors, including housing and lending.
